Market Sentiment: Choppy Going Up, Hard and Fast Going Down

When I see this candlestick pattern (see description next paragraph), I take it as a reading of market sentiment. The S&P 500 is now back to flat for the day. The Dow is lagging behind and is still positive; since the Dow was up much higher in percentage terms, this is not surprising.


Notice on this chart that the uptrend was choppy and sloppy going up, but hard and fast going down. This tells me that traders are uneasy taking a long position, but quick to liquidate and/or short when the market turns. Note on the left the frequency of red, downward candles and long wicks in an uptrend. Note also on the right the lack of green candles and the rapidity of the downward move.

Crude Shows Signs of Firming

I'm not ready to buy yet, but today's chart shows signs of finding support. A doji, which we see on the daily chart (not shown), favors the existing trend, which is currently bearish. Goldman's call for Brent to fall to $105 could yet drive WTI crude oil down to a price level of $90-93, which would put oil at about the price levels of mid-February.

Candlestick Patterns -- Powerful Tools of Sentiment

This chart shows a chart pattern that uses Japanese Candlesticks. These "smart" little time interval depictions can provide very helpful information regarding the direction of the markets. There are various websites across the Internet that provide very good instruction on the use of candlesticks as indicators.
This chart shows one known as a bullish engulfing pattern. When a candle reverses such that the body of the new candle completely encompasses the price range of the previous candle that was moving in the opposite direction, then it is considered to be a sign of a reversal. In this chart, the long green maribozu candle at the right of the encircled area has a price range that completely encompasses the prior red candle. If the new candle "engulfs" more than the previous candle, then the force and validity of that reversal is enhanced. In this case, the green candle engulfs not only the previous red candle, but the previous seven red candles. The resulting bullish reversal is proof of the power of this pattern.

The engulfing pattern is a very strong sign of a significant reversal in the opposite direction. Often, a candlestick pattern on one time frame (this one is 3 minutes) will be matched with another candlestick pattern on another time frame (perhaps a 15 minute chart), thus reinforcing the reversal sign. Traders would be wise to learn and use candlestick patterns, because they are a powerful tool in the arsenal for recognizing short-term market sentiment, especially reversals. They can help us make more money by identifying early reversals, and they can save us money by protecting us from reversals against our positions.

I printed various japanese candletick patterns from various websites and put them in a binder, which I study regularly to sharpen my acuity to recognition of these patterns.

Gold Buyers Step In on Dips

Note in this (daily) chart that buying volume has picked up again over the last two trading sessions. The blue circle in the sub-graph shows that gold is being bought on dips, but at progressively higher price levels. It is also being sold at lower levels; the last dip only lasted a day and a half. This pattern will force a break-out -- either up or down -- fairly soon.

I have also marked two tightening trend lines; one is the long-term gold trend, and the second is a weakening price trend. This bullish trend is marked as a pair of light blue lines, and the more recent bearish sentiment is marked with a burgundy trend line. Due to the long-term bull trend in gold, its safe-haven status, and the dogged devotion to the precious metals among gold bugs, I personally suspect that the gold trend will continue, and that buying will push gold prices to new highs. It is hard to imagine a scenario in which gold prices would fall, unless economic activity falters significantly. From a statistical standpoint, this pattern has a high probability of an eventual break-out to the upside. I could always be surprised, however.